England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CENTRAL LONDON
COUNTY COURT
HHJ BAILEY
TCC09070

		Royal Courts of Justice Strand, London, WC2A 2LL
		13/03/2013

Lord Justice Kitchin:

1. This is an appeal against the judgment of HHJ Bailey dated 30 August 2011 and his consequential order dated 21 December 2011 dismissing the claim by the appellant (Relicpride) for payment of £35,000 retained from the sale price of a house at 2 Connaught Mews in Pond Street, Hampstead (the property) which is owned and occupied by the respondents (Mr and Mrs Cordara).
2. The retention is held by Mr and Mrs Cordara's solicitors as stakeholders. The judge held that Relicpride was not entitled to the retention or any part of it because the preconditions for its release had not been satisfied. The central issue on this appeal is whether the judge was right to so hold, and I believe it turns on the proper interpretation of the agreements under which the property was purchased and the retention held.
3. The relevant background may be summarised as follows. In the late 1990s, Faddian Holdings Limited (Faddian), a company incorporated in Jersey, acquired a site off Pond Street for residential development. It obtained planning permission and engaged Relicpride to carry out the necessary building work on its behalf.
4. In 2001, Mr Cordara, a Queen's Counsel specialising in commercial and tax law, and his wife, Mrs Cordara, an artist, were introduced to the development and on 12 June 2001 they entered into a written agreement with Faddian to buy the property which was at that stage in the course of construction. The agreement incorporated various special conditions of which the following have a particular bearing on this dispute. By special condition 11, Faddian was obliged to construct the property in accordance with particular drawings and specifications and in accordance with the appropriate planning consents. Special condition 14 provided that completion was to take place between 23 July and 15 August 2001. Importantly, by special condition 17, upon completion of the construction, Faddian was obliged to notify the Cordaras and allow them to inspect the property; the Cordaras were required to notify Faddian of any wants of construction which they found upon such inspection; and Faddian was obliged to use its reasonable endeavours to remedy any such deficiencies prior to completion of the sale.
5. In late July 2001, problems arose with the local planning authority, the London Borough of Camden (Camden). By letter dated 25 July 2001, Camden complained to Relicpride about the installation of air conditioning units for which planning permission had not been granted. Then, by a further letter dated 27 July 2001, Camden drew attention to a number of other discrepancies between the development and the approved plans, including a failure to install a canopy over the front entrance to the property, an omission which, it considered, detracted from the overall quality of the scheme.
6. Camden also had a difficulty of its own. The proposed development had attracted local opposition and Camden had engaged in a consultation process on the basis that the second floor of the property would be of a particular and rather modest size. However, it then proceeded to grant planning permission for the construction of the property with a second floor of rather greater size. This led at least one local resident to threaten Camden with proceedings for judicial review. Camden therefore entered into negotiations with Faddian which led to an agreement in principle to resolve Camden's difficulty on the basis that Faddian would construct the property with the smaller second floor which formed the basis of the consultation, and that any alteration to the second floor would be precluded by an agreement under s.106 of the Town and Country Planning Act 1990. By the end of July 2001, the construction of the smaller second floor had been completed but the text of the s.106 agreement had not been agreed. This was another issue raised by Camden in its letter of 27 July 2001.
7. The Cordaras had been keeping a close eye on the construction work and towards the end of July 2001 instructed their surveyor, a Mr Marshall, to prepare a list of outstanding works. On 31 July 2001, he carried out an inspection and shortly afterwards produced a report containing a list of items referred to by the parties as "the List of Snagging Items" or "the Marshall list".
8. The property was nevertheless fit for occupation and, despite the various outstanding matters to which I have referred, the Cordaras and Faddian were keen that the sale should proceed to completion. To enable this to happen, on 3 August 2001, the Cordaras, Faddian and Relicpride entered into three separate but interrelated agreements in writing, two of which are relevant to this dispute. The first, referred to as the Supplemental Agreement, was made between the Cordaras and Faddian and provided that completion should take place on that same day but that the Cordaras should retain £35,000 out of the purchase price. This agreement substituted the following terms for special condition 17:

"3.1.1. [Faddian] shall procure that [Relicpride] complies with its obligations in an Agreement dated 3 August 2001 and made between the [Cordaras] and [Relicpride] ("Relicpride Agreement") and if Relicpride fails to carry out its obligations then in default of the Seller carrying them out within a further month to indemnify the [Cordaras] in respect of the reasonable and proper cost of carrying out the List of Snagging Items (as that expression is defined in the Relicpride Agreement)

3.1.2 The [Cordaras] shall retain £35,000 out of the Purchase Price which shall be retained by the [Cordaras'] solicitor as stakeholder ("the Retention")

3.1.3 The Retention shall be paid to [Faddian] immediately upon the occurrence of the last of the following events:

a) completion of the Section 106 Agreement and the issue of the resultant Planning Permission in the form previously agreed with the [Cordaras'] solicitors;

b) the satisfactory completion of those works referred to in the Relicpride Agreement;

c) the issue by the District Surveyor for the London Borough of Camden of his certificate or other form of confirmation that the works referred to in this fax dated 30 July 2001 addressed to Liam Coyle of Relicpride Building Company Limited have been completed."

9. The second, referred to as the Relicpride Agreement, was made between the Cordaras and Relicpride. It reads, so far as material:

"1. [Relicpride] shall within the next two months carry out and complete

1.1 those snagging items set out in the attached list marked "List of Snagging Items";

1.2 the outstanding matters detailed in the District Surveyor's fax dated 30 July addressed to Liam Coyle of Relicpride bearing reference number 00/2/418.

2. [Relicpride] shall carry out and complete such further works to the Property in order to satisfy those objections of the Local Planning Officer set out in his two letters dated 25 July 2001 and the other 27 July 2001 both addressed to [Relicpride] in so far as they relate to the Property.

3. The [Cordaras] confirm that they will do all reasonable things necessary to assist in procuring completion of the Section 106 Agreement and the issue of the resultant Planning Permission including granting access to the Property on reasonable notice in writing and having been consulted prior thereto on the works required to enable [Faddian] to carry out any necessary works to it [Relicpride] making good all damage occasioned thereby and being a party to the Section 106 Agreement (if required by the Local Planning Authority) but without any obligation to incur any expense in doing so."

10. Completion duly took place. The Cordaras retained £35,000 out of the purchase price which they paid to their solicitors, Tweedie & Prideaux, now Veale Wasborough Vizards; they released the balance of the purchase price, amounting to about £2.2 million, to Faddian; and they moved into the property where they have lived ever since.
11. The agreements contemplated that all outstanding items would be addressed within a relatively short time and the retention would then be paid over to Faddian. But that did not happen and the Cordaras say it has never fallen due for a variety of reasons, as I must now explain.
12. First, the Cordaras say there has never been a s.106 agreement. Its substance was agreed in principle in early August 2001 but Camden deferred completion pending resolution of the other planning issues raised in its letters of 25 and 27 July 2001. Negotiations between Relicpride, Faddian and Camden continued over the next few months until, in February 2002, Camden changed its stance and indicated that completion of the construction of the property with the smaller second floor had superseded the need for a s.106 agreement but that a further application for permission should be submitted with revised plans showing the property as built. On 15 May 2002, a further application was duly submitted by Relicpride and, on 4 October 2002, planning consent was granted. From that point Camden no longer required the s.106 agreement and, as the judge found, was no longer prepared to enter into it.
13. Second, the Cordaras say that not all the snagging items in the Marshall list referred to in clause 1.1 of the Relicpride Agreement and clause 3.1.1 and 3.1.3(b) of the Supplemental Agreement have been remedied. In the course of August 2001, Relicpride carried out certain works to address these items and Mr Coyle, a director of Relicpride, thought that the Cordaras were generally content with the work it had done. So he was rather surprised to receive towards the end of the month an amended and expanded snagging list. Mr Coyle met Mr Cordara on a number of occasions and formed the view that Mr Cordara was seeking an unreasonably high level of quality. For his part, Mr Cordara considered that he and his wife had paid a considerable sum for a luxury house and were entitled to expect a commensurate standard of workmanship. During the remainder of 2001 and over the course of 2002, Relicpride made further occasional visits to the property and carried out some work but the Cordaras were concerned as to its quality. On 13 January 2003, Mr Cordara arranged for another surveyor, Mr Hanchet, to inspect the property. His notes showed that the majority of the Marshall list items had been attended to by this time, but some had not. No further progress was made in relation to them in 2003 or subsequently with the result that, as the judge found, six items of various degrees of seriousness were never addressed.
14. Third, the Cordaras say Camden's objection to the air conditioning units was never resolved. The obligations in respect of these units are contained in clause 2 of the Relicpride Agreement and in clause 3.1.3(b) of the Supplemental Agreement. The letter from Camden dated 25 July 2001 gave Relicpride two options, namely apply for planning consent for the units or remove them. The latter option was not, however, open to Faddian or Relicpride under the terms of the contract of sale. Accordingly, in August 2001, Relicpride made an application for planning permission which was eventually granted on 4 October 2002. This permission contained stringent acoustic requirements. In the event, the necessary construction work including, most importantly, the installation of an appropriate acoustic housing, was never carried out. Relicpride engaged appropriate designers and engineers but, in the face of concerns expressed by Mr Cordara, the work was abandoned. Many years later, the Cordaras removed the air conditioning units, extended their living room and placed the units towards the end of their garden in a completely different housing.
15. The final matter relied upon by the Cordaras concerns the installation of the entrance canopy. The objection by Camden to the failure to install a canopy was raised in its letter of 27 July 2001 and the obligations in respect of it are contained in clause 2 of the Relicpride Agreement and clause 3.1.3(b) of the Supplemental Agreement. The further planning application made by Relicpride in May 2002 and the permission granted by Camden in October 2002 to which I have referred dealt with this objection because the canopy was not shown in the revised plans.
16. On 7 December 2004, the Cordaras' solicitors wrote to Faddian's solicitors asserting that the conditions specified in the Supplemental Agreement had not been met in that no s.106 agreement had been reached. They also contended there had been multiple breaches of the Relicpride Agreement and of the Supplemental Agreement and attached to their letter a schedule of defects. They explained that no quote had yet been obtained for the necessary remedial works but maintained that each defect constituted a breach of contract and that the damages would be substantial and far in excess of the £35,000 retention.
17. Meanwhile Faddian and Relicpride were themselves in dispute. In addition to the £35,000 retained by the Cordaras from the purchase price, Faddian had retained £55,000 from the sum otherwise due to Relicpride. On 12 August 2005, Relicpride commenced proceedings against Faddian in the Technology and Construction Court claiming nearly £100,000, including the £35,000 retention. These proceedings were eventually settled on the basis of a payment of a sum of money by Faddian to Relicpride and an assignment of its causes of action against the Cordaras.
18. Then, on 24 January 2007, Relicpride issued these proceedings against the Cordaras in the Central London County Court and, with the benefit of the assignment, claimed the retention either as a sum due under the Supplemental Agreement or as damages for breach of it. The Cordaras served a defence denying the retention had ever become payable and asserting that Faddian was guilty of multiple breaches of the sale agreement and of the Supplemental Agreement. Schedules appended to the defence set out details of alleged defects in construction and the costs already incurred or likely to be incurred in remedying them. The Cordaras maintained that if, contrary to their primary contention, the retention or any part of it had become payable, they were entitled to set these costs off against it, so eliminating any liability they might otherwise have.
19. Before coming to the judgment, there is one other matter to which I must refer. Faddian, having resolved its dispute with Relicpride, allowed itself to be struck off the register of companies in Jersey. The Cordaras became aware of this and, after service of their defence in these proceedings, sought and obtained an order in Jersey to have Faddian restored to the register. Then, on 13 July 2007, they issued proceedings against it in the Jersey courts seeking damages for breach of the original sale agreement and the Supplemental Agreement. They also sought payment of the retention. On 5 March 2008, judgment was entered for the Cordaras by consent in a sum slightly in excess of £132,000, comprising the £35,000 retention and damages. That order remains entirely unsatisfied because Faddian, as a special purpose vehicle, had no funds.
20. Relicpride became aware of the proceedings in Jersey shortly after their commencement and was concerned that they had been instigated by the Cordaras in order to secure a procedural advantage in these proceedings. It therefore made an application to restrain the Cordaras from pursuing the Jersey proceedings. That application was dismissed by HHJ Faber by order dated 18 February 2008. Relicpride then appealed against that order, and the appeal came on for hearing before Patten J on 21 October 2008. At that hearing the Cordaras stated in open court that they did not intend to rely upon the order they had secured in Jersey in any way in these proceedings, whereupon Relicpride withdrew its appeal.
21. The trial of these proceedings began on 22 February 2010 but the production of late disclosure by Relicpride led to its adjournment. On 13 May 2010, the judge directed that the trial be listed for a further three days to hear all issues save for what he described as the defects dispute, that is to say whether and to what extent defects in construction rendered Faddian in breach of the sale agreement and the Supplemental Agreement and the extent of any resultant loss and damage suffered by the Cordaras.
22. The trial eventually resumed on 20 June 2011. A number of issues were not pursued, but it remained to be decided whether the Cordaras had a defence to the claim for the payment of the retention as a result of any or all of the four matters to which I have referred, namely:

i) the failure to complete the s.106 agreement;

ii) the failure to complete all of the items of work set out in the Marshall list;

iii) the failure to complete the necessary works in relation to the air conditioning units;

iv) the failure to install an entrance canopy.

23. The judge addressed each of these matters in turn. As for the s.106 agreement, he was conscious that this was for Camden's benefit and that, from October 2002, it no longer required it. Nevertheless, he considered the words of clause 3.1.3(a) of the Supplemental Agreement were clear and unambiguous and gave rise to no difficulty of construction. They required the completion of the s.106 agreement before any part of the retention could be released.
24. The judge then addressed the Marshall list. As I have said, the judge found that six items on this list had not been addressed. He continued that the Marshall list is expressly referred to in clause 1.1 of the Relicpride Agreement and the failure to complete all the items on the list meant that Relicpride could not demonstrate compliance with the precondition set out in clause 3.1.3(b) of the Supplemental Agreement, namely the satisfactory completion of those works referred to in the Relicpride Agreement. It mattered not, he continued, that the cost of carrying out these works would be far less than the retention.
25. The position in relation to the air conditioning units was the same. These units were referred to in clause 2 of the Relicpride Agreement, having been raised by Camden in its letter of 25 July 2001. The failure by Relicpride to install an appropriate acoustic housing and so satisfy Camden's objection meant that for this further reason Relicpride could not demonstrate compliance with the precondition set out in clause 3.1.3(b) of the Supplemental Agreement.
26. That left the entrance canopy. The absence of an entrance canopy was raised by Camden in its letter of 27 July 2001 and so was referred to in clause 2 of the Relicpride Agreement. In this case, however, the judge found that the involvement of the Cordaras in the process of submitting the revised plans to Camden in May 2002 was such that they had agreed to the abandonment of this feature. But he also held their agreement had been secured by a misrepresentation by Relicpride as to the effect the installation of a canopy would have upon a guarantee given in relation to the external finish of the property. Once the revised planning permission had been obtained it was, the judge thought, too late to alter the position with the result that the Cordaras could not assert the failure to install a canopy amounted to a failure to satisfy the precondition set out in clause 3.1.3(b), although they did have a claim for damages.
27. On this appeal Relicpride does not challenge the judge's finding that six items of work on the Marshall list have never been addressed. Nor does it challenge the judge's finding that it failed to carry out sufficient work on the air conditioning units to satisfy Camden's objection set out in its letter of 25 July 2001. However, it contends that the judge ought to have held that the Cordaras had, by asserting and pursuing a claim for damages, made an election and were not thereafter entitled to insist on further performance or rely upon non-compliance as a defence to a claim for payment of the retention. Alternatively, it contends that on the correct interpretation of the Supplemental Agreement and in the event of non-fulfilment of any of the conditions set out in clause 3.1.3, the Cordaras' remedy was a financial one, and that the retention was payable subject to an indemnity in respect of any loss and damage they have suffered.
28. The Cordaras maintain the judge was right to hold as he did that clause 3.1.3 contained a series of preconditions, each of which had to be satisfied before the retention fell due. They also say he correctly found that those preconditions had not been satisfied as a result of each of the failures set out at (i)-(iii) of [22] above. But they contend he ought also to have found the preconditions had not been satisfied as a result of the failure to install an entrance canopy.
29. At the hearing of the appeal we explored with the parties whether the issues arising could be determined by reference to one of the admitted failures, namely the failure to carry out the works necessary to satisfy Camden's objection to the air conditioning units. It appeared to us that if this constituted a failure to satisfy a precondition for the release of any part of the retention upon which the Cordaras could rely then the appeal must fail. If, on the other hand, it did not, the appeal must succeed and the case remitted for a consideration of the extent to which any claim by the Cordaras could be set off against the retention so as to reduce or extinguish it. Upon Mr Cordara helpfully acknowledging that he and Mrs Cordara had suffered no loss as a result of the failure by Faddian to enter into the s.106 agreement, and upon all the parties acknowledging that any claim for losses incurred as a result of the failure to install an entrance canopy had not been adjudicated upon, it was accepted that we could indeed take that course. We are indebted to the parties and those acting for them for their assistance in this regard for it greatly shortened the time necessary for the hearing of the appeal.
30. It followed that the only issues upon which we heard argument were first, whether the Cordaras are precluded by their conduct from relying upon the terms of clause 3.1.3 of the Supplemental Agreement as preconditions for the release of any part of the retention; and second, whether clause 3.1.3 comprises a series of preconditions for the release of any part of the retention in any event. Although we were addressed upon these issues in that order, it seems to me more logical to begin with the second.
31. This second issue turns on the proper interpretation of the Supplemental Agreement and, by reference, the Relicpride Agreement. It is of course well established that the exercise of interpretation of a contract is an attempt to ascertain the common intention of the parties. Moreover, the exercise is an objective one and so the question is what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language of the contract to mean.
32. Now there can be no doubt that the parties intended the whole retention to be paid to Faddian immediately upon the occurrence of the last of the three events specified in clause 3.1.3. This is clear from the opening words of the clause:

"The Retention shall be paid to Faddian immediately upon the occurrence of the last of the following events: …"

The crucial question, however, is what the parties intended should happen if one or more of the events did not occur within a reasonable time or if it were to become apparent that one or more of the events would never occur. This is not something which, on a literal reading, the clause addresses at all.

33. The Cordaras contend, and the judge accepted, that in such circumstances no part of the retention would be payable to Faddian. But the Cordaras are less clear as to whether the retention would continue to be held by their solicitors, in some indeterminate state, possibly forever, or whether they would be entitled to its return. This is not a matter with which the judge ever fully grappled, but he certainly accepted the former as a possibility. As he said, this might or might not be the result; but the possibility that the retention might remain for all eternity on the account of the Cordaras' solicitors was not a reason to rewrite the contract.
34. Relicpride, on the other hand, argues that Faddian would be entitled to the retention subject to any loss or damage that the Cordaras may have suffered through any failure to perform.
35. In assessing these rival submissions I begin with the factual matrix at the beginning of August 2001. Central to this matrix was the pre-existing contract for the sale of the property which provided for completion by the 15 August. It was a luxury property and being sold for a commensurate price. It had, however, become clear that there were snagging problems and outstanding planning issues. Nevertheless, the property was fit for occupation and the parties were keen to proceed to completion.
36. Against this background the parties came to negotiate the three interrelated agreements of 3 August. The contracting parties were the Cordaras, as purchasers, Faddian, an offshore special purpose vehicle as vendor, and Relicpride, the party carrying out the construction work. The agreements were prepared in a relatively short space of time and reflect the desire of the parties to complete the sale, providing as they do for completion to take place on the same day. But the agreements also require Faddian and Relicpride to address the various outstanding works and planning issues and they recognise that the Cordaras needed some security to protect them in the event of a failure by Faddian, or Relicpride as the principal contractor, to complete those works. This was entirely to be expected bearing in mind the corporate nature and offshore status of Faddian. Here then is the origin of the retention. Importantly, it is not described as a reduction in the purchase price. To the contrary, it is described as part of the purchase price and is to be held by the Cordaras' solicitors as stakeholders.
37. The description of the retention as part of the purchase price does, to my mind, give some indication of the parties' intention. But so also do clause 3.1.1 of the Supplemental Agreement and clause 1 of the Relicpride Agreement. As has been seen, these provide for Relicpride to complete the works on the Marshall list within two months of 3 August or for Faddian to carry them out within one month thereafter. In default, the Cordaras may themselves carry out the outstanding works against an indemnity from Faddian. But from which funds are the Cordaras to be indemnified? Upon their argument it cannot be from the retention because, on this scenario, no part of the retention would ever be payable to Faddian. So any such default must generate a claim for an indemnity or damages quite separate from the retention. I have to say this seems most unlikely to have been the parties' intention, for it would deprive the retention of what appears to me to have been its real purpose.
38. The difficulties with the interpretation contended for by the Cordaras do not, however, end there. As I have mentioned, the judge did not grapple with the position of the Cordaras' solicitors as stakeholders. In the event of a default by Faddian, he considered they might be required to hold the retention indefinitely. But I believe this would be to attribute to the parties an intention which they could not have had. It would have made no sense for them to agree the retention should be condemned to such a sterile fate. I rather think Mr Cordara recognised the unreasonable nature of this result when, in the course of his oral submissions, he contended that he and Mrs Cordara were entitled to the return of the retention. But this would mean the Cordaras were entitled both to the return of the retention and to an indemnity and damages in respect of any breach. It would therefore provide them with the benefit of a substantial reduction in the purchase price and compensation for any losses they may have suffered, in short double recovery. Once again I find the submission advanced by the Cordaras amounts to an invitation to attribute to the parties a most improbable intention and I do not believe it is one which a reasonable person would have understood them to have had.
39. In light of these considerations I return to the wording of clause 3.1.3. It says that Faddian is entitled to the whole of the retention on the occurrence of the last of the three specified events. But it does not say that, should it become apparent that one or more of those events would never occur, the Cordaras' solicitors would be obliged to continue to hold the retention. Nor does it say that the Cordaras would then be entitled to the whole of the retention themselves, in addition to a claim for damages. For the reasons I have given, I believe that both of these interpretations would produce an absurd result which the parties cannot have intended.
40. Accordingly, what did the parties intend by clause 3.1.3 or, perhaps more accurately, clause 3.1 as a whole? I believe that intention is clear, though not fully stated. The purpose of the retention was to act as security by ensuring that the Cordaras had a sum available in this jurisdiction from which to indemnify themselves in respect of any loss or damage they might suffer through a failure by Faddian or Relicpride to address the various outstanding items referred to in the Supplemental Agreement. The Cordaras were obliged to give Faddian a reasonable opportunity to fulfil its outstanding obligations and ensure the various events set out in clause 3.1.3 occurred. If Faddian failed to do so, the Cordaras were entitled to an indemnity in respect of any loss or damage they suffered as a result. But the balance, if any, of the retention would then be payable to Faddian as the outstanding part of the purchase price. This is not expressly stated but is what any reasonable person would understand the agreement, read as a whole against the relevant background, to mean. It is necessary to give effect to the reasonable expectation of the parties.
41. It follows that I believe the judge fell into error in construing the Supplemental Agreement. He ought to have found that Relicpride was entitled to the retention subject to a set off in respect of any loss or damage suffered by the Cordaras as a result of the failures by Faddian and Relicpride to perform their obligations.
42. In these circumstances it is neither necessary nor appropriate to address in any detail the other argument advanced by Relicpride, namely that the Cordaras have, by asserting a claim for damages in their letter of 7 December 2004 and in the Jersey proceedings, made an election and are no longer entitled to insist on any further performance of the conditions in the Supplemental Agreement or to set up non-compliance as a defence to a claim for payment of the retention. I would simply observe, however, that by December 2004 Faddian had made clear that it had no intention of fulfilling any outstanding obligations it may have had. As the judge put it in relation to the default upon which we have been invited to decide this appeal, Relicpride had abandoned work on the acoustic housing for the air conditioning units. For my part, I am therefore doubtful that, had I accepted the Cordaras' submissions as to the proper interpretation of the Supplemental Agreement, this point would have been of any assistance to Relicpride.
43. Nevertheless, for the reasons I have given, I would allow the appeal and remit the case for an assessment of the loss and damage suffered by the Cordaras and a determination of what part, if any, of the retention is due and payable to Relicpride.

Lord Justice Moore-Bick:

44. I agree.

Master of the Rolls:

45. I also agree.